Give energy market a watchdog

Give energy market a watchdog

By: Gordon L. Weil

The proposed sale of NB Power to Hydro-Québec has collapsed, but the way the deal was handled offers lessons for Canadians.

In New Brunswick, the government saw the proposal with its possibility of lower rates as a political plus. In Quebec, it was meant to boost the fortunes of the provincial utility by improving its access to the New England market.

Though it might have met political goals, the deal did not get any kind of independent regulatory review.

For about a century, independent regulators have been scrutinizing utilities. They approve or disapprove rates, mergers, new transmission lines, debt and most other essential facets of utility operations. Their job is to insure reasonable rates and reliable service for customers and sufficient revenues for utilities.

Utility regulation arose as a way of insulating politicians from the complexity of understanding utility operations and the political downside of agreeing to rate increases. Regulators could act like judges, not legislators. It has generally turned out to be a good idea.

The proposed deal could have been reviewed to see if it imposed too much risk on New Brunswick customers or if Quebec customers were being forced to subsidize the transaction.

Regulators certainly would have carefully studied the most unusual aspect of the deal – that it was meant to last forever.

This deal was an eerie reminder of the contentious agreement between Newfoundland and Labrador and Quebec for the sale of Churchill Falls power. Even that deal, in which Newfoundland and Labrador felt cheated, is not perpetual, but it set low compensation for a long period. It, too, could have benefited from some regulatory review.

In fact, the only regulators to look at the New Brunswick-Quebec accord would have been the Federal Energy Regulatory Commission (FERC) in Washington.

Hydro-Québec hoped to transmit power across New Brunswick to Maine, thus finally gaining control over every connection between Canada and New England. But this dominant access could have given it “market power,” the ability to set the cost of electricity for the region. In that case, FERC could have stripped it of its right to sell at market rates, a move that would have made the deal worthless.

It might seem odd that a purely Canadian transaction would only get an independent review in another country. But the terms of the deal prevented regulatory review and made what amounted to rulings that would normally have come from a regulator. For example, having New Brunswick customers pay the costs of upgrading interconnections between the provinces was deemed acceptable.

The obvious solution is some form of federal regulation. That is possible in the United States because of the Commerce Clause of the Constitution, which allows federal regulation of interstate commerce.

In the United States, utility regulators exist at both the federal and state levels. They may each look at different aspects of the same deal. State regulators are expected to look out for their local interests. Federal regulation is based on the need to insure the free and fair flow of interstate trade.

With a comparable constitutional provision but no strong interprovincial agreement, that is not now possible in Canada. Many provinces would not likely be pleased to have a federal regulator looking over their deals with neighboring provinces or with American entities.

Perhaps there is a way that could protect customers without being nearly as extensive as American regulation.

A Canadian federal regulator could review transactions involving power flows originated in one province and crossing another on its way to a third market. This authority would apply mostly in eastern Canada.

For example, if Hydro-Québec wanted to sell power to New England by transmitting across New Brunswick, the transaction would be regulated. An impartial body might block Hydro-Québec from monopolizing the New England interconnections, thus encouraging new green power resources in the Maritimes.

Imagine if this proposal had applied to the Churchill Falls transaction. Newfoundland and Labrador could have sold to the American market instead of being forced to sell to Hydro-Québec. And a regulator could have set a reasonable rate for both parties.

Hydro-Québec reportedly wants to sell power to Nova Scotia and P.E.I across the New Brunswick system. A regulator could assure a fair deal for all parties.

For transactions between two neighboring provinces, such regulatory review could be optional. The parties could choose federal regulation or make the deal without such review.

The regulator could also have the authority to approve mergers across provincial borders. It could provide neutral assurance that customers would be no worse off because of a merger.

If two or more provinces chose to create a regional power market, an idea that could work well in the Maritimes plus perhaps Newfoundland and Labrador, an interprovincial regulator would almost be a necessity.

Of course, Canada need not create such a regulator from scratch. The National Energy Board is a professional and respected federal agency whose responsibilities could be enlarged.

This proposal may be viewed as radical, given Canadian traditions and the desire of provincial utilities for a free hand. But it might prove to be the best way to protect the people on the other side of the deal from the utilities – the consumers.

Gordon L. Weil is the president of Standard Energy Company of Maine. He has written several papers for the Atlantic Institute for Market Studies (www.AIMS.ca ) on NB Power, including articles on the proposed MOU to sell NB Power assets to Hydro-Québec.